Crude oil demand during this quarter will likely register the largest decline on record, larger even than the slump that accompanied the 2008 financial crisis, IHS Markit has forecast.
The market research firm unsurprisingly attributed the slump to the decline in economic activity resulting from the coronavirus outbreak, calling the situation in China, where the outbreak started, “an unprecedented stoppage” of economic activity.
With pretty much every industry suffering the blow of the outbreak, IHS Markit said it expected oil demand to drop by as much as 3.8 million bpd this quarter, to 96 million bpd.
This is bad news for OPEC, which is meeting today and tomorrow in Vienna to discuss additional cuts of 1 million bpd, which would bring their total cuts to 2.7 million bpd. Adding to this the more than 1 million bpd decline in Libyan oil production because of the oil port blockade, and the cartel would, part voluntarily and part forcibly, reduce its production by the same rate as IHS forecasts demand will fall.
This means that oil prices won’t change much because OPEC production would be largely in line with global oil demand at the time. This is certainly disheartening as Gulf economies are beginning to feel the pinch of the coronavirus outbreak beyond oil already.
Meanwhile, OPEC appears to be split on how much to cut, further complicating the price situation. Libya is against further cuts calling them illogical, while Saudi Arabia, which needs much higher oil prices to balance its budget, is pushing for cuts of over 1 million bpd on top of the Libyan production outage.
Russia is waiting for the last moment to announce its decision of whether it will take part in this round of cuts or sit it out.
In this situation of uncertainty, one thing seems to be almost certain: the fallout of the epidemic that began in Wuhan, China, last December will be severe and extended, affecting all industries across the world.
By Irina Slav for Oilprice.com
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They ignore the fact that there is a huge difference between a decline in oil demand resulting from a weak economy and one caused by an aberration, namely the coronavirus outbreak. The first signifies a lack of appetite for oil because of inherent weakness in the global economy while the second means inability of the global oil market to access its oil needs because of physical hindrances like being in a quarantine.
In January a month before the onset of the coronavirus outbreak the projections were that the global economy will grow by 3.3% in 2020 and global oil demand will add 1.2 million barrels a day (mbd) over 2019. Suddenly this changed because of the outbreak. So logic tells us that once the outbreak is controlled, the global oil demand and oil prices will recoup all their losses. Those who are making frenzied projections should listen to logic and not to hysteria.
Until the outbreak is contained, no one can accurately assess its adverse impact on global oil demand. That is why any deepening of OPEC cuts while the outbreak is still going on is oil down the drain. For OPEC to reduce the huge glut that has risen to an estimated 5 mbd as a result of almost two years of trade war between the US and China, it has to cut production by 5.0 mbd. This is impossible to do since it will bankrupt the economies of Saudi Arabia and other OPEC members.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London